As Thanksgiving week begins, there was a surprising economic report just released. The National Association of Home Builders/Wells Fargo Housing Market Index dropped eight points in November to 60, according to a report Monday. That compared with the median estimate of economists for a one-point drop to 67. Why the large drop? Is this drop a leading indicator for next year? What should you do?
Why have homebuilders tanked?
As GDP numbers continue to excel, the S&P homebuilders index has fallen 30% and now the homebuilder’s sentiment has dropped to the lowest level in 4 years. Not only do builders report that sales have slowed abruptly, but expectations for future sales have also fallen substantially. This shows builders aren’t optimistic about the present or the future!
Why has the index fallen so abruptly as GDP continues to increase? With the economy plugging along so well one would expect consumers to increase long term purchases. Consumers are painting a radically different picture. Below are three explanations on the recent drop.
- Without meaningful real wage growth consumers are unable/unwilling to make larger purchases. In many markets this is now reflected in greatly reduced sales. For example, in Denver, Colorado sales above 500k have fallen 44% when comparing September 2017 to September 2018. Real wages are not growing fast enough to compensate for the rise in property values.
- Rates have risen substantially crimping buyer power. 10-year treasury rates have risen substantially and driven up 30-year mortgages well above 5% from a low of around 3%. Without wage growth consumers can’t absorb such a large increase and therefore have refrained/delayed buying properties which is being felt through homebuilder stocks.
- Building costs have risen: Building costs have risen substantially due to a shortage of skilled labor that has driven up labor costs. Along with labor costs raw materials have also increased from lumber to appliances due to the ongoing trade war. The raw land for building has also increased substantially in most metro areas. All of theses costs are flowing through to the consumer as the builder is unable to absorb the cost increases.
Why should you care about the Homebuilder’s index?
The homebuilders index is a leading indicator of consumer confidence. As consumers feel more anxious about the future, they are less likely to make large financial commitments like a house. According to Bloomberg economics, Previous extended declines in the homebuilder index — which dates to 1985 — have preceded the last three recessions.
Is the recent drop indicative of the next recession?
Although it is hard to make a case that we are beginning a trend from one economic report, it is important to heed the warning signs. The homebuilder index’s recent decline is a stark reminder of where we are in the current economic cycle and the inherent risks in a late cycle.
What should you do?
First, this recent economic news should stir some “lively” family discussion around the dinner table. The homebuilder’s sentiment is a leading indicator that is flashing a warning sign of what could be to come for consumer confidence. As Thanksgiving week and the holiday season begins, consumer confidence will be on full display. How the consumer reacts to rising rates and the recent market volatility will be crucial to the upcoming year in real estate. The homebuilder’s indexs recent hiccup is a good reminder to “stay alert” as the seas are beginning to get a little choppy. Only time will tell whether the boat takes on water or is able to sail to smoother waters.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).